3 years ago

Annual Report 2012

Annual Report 2012

GROUPNote 22 - Financial

GROUPNote 22 - Financial risk management, objectives and policiesRisk management overviewGenerally the market conditions for shipping activities are volatile and, as a consequence, the result may varyconsiderably from year to year. Market risks are related to freight rates, bunker prices and vessel prices, whichthe Company has no or limited possibilities to influence or hedge. In addition the Company is exposed to anumber of different financial risks such as liquidity-, interest rate-, and currency risks arising from our normalbusiness activities. Such risks are monitored on a regular basis, and the Company might use financialderivatives to limit the exposure.Market risksFreight rate risksFluctuations in freight rates are the key factor influencing Eitzen Chemical’s cash flow and results. To limit theexposure, the future open ship days are hedged by entering into fixed long-term Contracts of Affreightment(CoA) and time charters. The time charters generate secure cash flow for the period it is effective, while theCoAs have fluctuating cargo nominations, depending on each customer’s requirement.Bunker price risksThe exposure to fluctuations in bunker prices depends on the type of contract. Exposure in a spot trade istaken into consideration when the spot charter rate is determined. The Company seeks to reduce the exposureto fluctuating bunker fuel prices through compensation clauses in contracts with clients. On contracts (CoAs)where this is not possible the Company use commodity based derivative to reduce the bunker exposure.Vessel price risksThe risk of changes in the value of the Company’s owned and leased vessels are one of Eitzen Chemical’s mostmaterial risks. At the end of 2012, the Company had 36 owned vessels and 13 leasing vessels with purchaseoption (including financial- and operational leases). The change in asset values will affect Eitzen Chemical’s NetAsset Value (NAV), while a change in the value of financial leased vessels will only affect the Company’stheoretical NAV.Financial risksLiquidity riskThe Company finalized the financial restructuring of the Company’s bank and bond debt in January 2013. UntilJanuary 2015, the Company’s cash commitments on interest payments are limited to LIBOR on therestructured bank debt. All other interest commitments may accrue on the balance of the bank and bondfacilities. Thereafter the Company is obliged to pay LIBOR plus a margin of 2.75 per cent on the majority of theloans.Fixed debt instalments will commence in April 2015 with flexible repayment terms from then to maturity inMay 2016. In 2015 minimum USD 14.4 million in instalments are due in in the fourth quarter. Thereafter, allloans mature in 2016. There is significant long term risk associated with the current leverage of the Companyand the liquidity risk inherent in the Company’s financial liabilities is considerable.Eitzen Chemical remains confident that the chemical tanker market eventually will benefit from improvedmarket fundamentals and fully recover. However, the Company is dependent on a substantial increase infreight rates compared to today’s market to meet its financial liabilities.The Company also has a cash covenant which requires that Eitzen Chemical (on a consolidated basis) shallmaintain cash and cash equivalents plus any undrawn credit under the 1. Lien Revolving Loan Facility for anamount equal to or greater than USD 30 million in 2013 and until maturity. As of 31 December 2012, theCompany’s cash position was USD 30.9 million and the 1. Lien Revolving Loan Facility was undrawn.Interest rate riskThe Company’s exposure to interest rate risk is related to interest-bearing assets and non-current debtliabilities. Eitzen Chemical’s management periodically review and assesses the interest rate risk, and considerhedging of such risk based on various short and long term effects on liquidity and results. A part of the54

GROUPCompany’s financial strategy is to utilise finance leases, which also limit the interest rate exposures since theleases are at a fixed level throughout the leasing period. As of 31 December 2012, 16 per cent of the debtcarried fixed rates (2011: 20 per cent), relating to obligations under financial leases.The following table shows estimated changes in profit before tax for the Company from reasonable possiblechanges in interest rates in 2012, with all other variables held constant.(USD ‘000)Change in Interest rate 2012 2011USD LIBOR + 1.50% 10 472 10 463+ 0.75% 5 236 5 232- 0.75% -5 236 -5 232- 1.50% -10 472 -10 463NIBOR + 1.50% 1 274 1 312+ 0.75% 637 656- 0.75% -637 -656- 1.50% -1 274 -1 312Currency riskThe Company’s functional currency is USD as the majority of the transactions are in USD. Currency riskstherefore arise in connection with transactions in other currencies than USD, including administrativeexpenses, declaration of vessel purchase options denominated in Japanese Yen, and debt financing in othercurrencies than USD. A significant share of the Company’s general and administrative expenses is in othercurrencies than USD, mainly Singapore Dollar, Danish and Norwegian kroner. Eitzen Chemical may use financialderivatives to reduce the net operational currency exposure.Eitzen Chemical has issued bonds denominated in NOK. As a result there is a currency exposure related to thebond loan accrued interest and principal which is due in 2016.As of 31 December 2012, the Company held 84 per cent (2011: 73 per cent) of total cash in USD, 2 per cent(2011: 16 per cent) in Norwegian Kroner, and 14 per cent (2011: 11 per cent) in other currencies.The following table shows estimated changes in profit before tax for the Company from reasonable possiblechanges in the US dollar exchange rate within the previous year, with all other variables held constant.Reasonable changes are defined as the standard deviation the five last years before reporting date.(USD ‘000)Change in currency rate 2012 2011USDNOK + 0.50 7 891 6 179- 0.50 -9 388 -7 247USDDKK + 0.40 595 838- 0.40 -675 -966USDJPY + 10.0 4 062 4 739- 10.0 -5 121 -6 144USDEUR + 0.05 128 158- 0.05 -145 -17655

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